Making money is one of the driving forces behind why we do business.
However, it can be tricky getting that money back in your hands once a business is incorporated.
It is important to withdraw money in a tax effective manner. There isn’t one answer that will work for everyone. Instead, there are a number of factors that should be considered.
Different types of income are taxed differently. A salary taken by the owner is taxed differently than a dividend. Likewise for corporations.
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Personal tax rates can be as low as zero and as high as 46.4 percent, depending on the province, while corporate tax rates for western provinces range from 13 to 46.7 percent.
Owners often take money out of their company as wages or salary. This can reduce the amount of taxable income in the company because wages are a deductible expense.
But wages are taxable to the person who gets them in the year they are paid. They are also subject to regular payroll deductions and remittances such as Canada Pension Plan.
A benefit of paying a salary is that it creates Registered Retirement Savings Plan contribution room and allows non-refundable tax credits to be used that might have otherwise expired. Also, individuals can receive CPP payments once they retire.
A bonus is another way to pay employment income, and is often decided on at the company’s year end. The amount is deductible to the company in the year it is declared.
However, if your company’s year end is after June 30, you may be able to defer adding the income to your personal tax return until the following calendar year because the bonus does not have to be paid until after the year end.
The advantage is that you can defer the personal tax created by the bonus but still get the immediate write-off for your company.
However, the bonus must be paid within 180 days of the company’s year end for it to be deductible to the company. As well, a bonus is another form of a wage so regular payroll deduction rules apply.
Farmers often employ family members. Payments to family can be an effective way to reduce the family tax burden because income is split among several people, allowing each to take advantage of lower tax rates.
The government has stipulations regarding paying family members. The amount paid must be reasonable for the work performed and should reflect what would be paid an unrelated person to do the same task.
You can charge the company rent if you personally own land or buildings that your company uses to generate income. The company would be able to deduct this as an expense.
You would report this as rental income on your personal tax return, less deductions such as loan interest, insurance, repairs and building maintenance.
Rent is not subject to payroll deductions, making it a way to avoid paying CPP on the funds that are removed.
However, rent may be subject to GST, which will require additional government filings. The company will pay it to you personally.
Ask your accountant if this would apply in your situation.
Paying a dividend from the company is a widely used option. The company pays dividends out of after tax dollars, which means they are not deductible for the company.
The restriction with dividends is that they must be paid to the company’s shareholders/owners.
Planning options when a company is set up include issuing shares of different classes to various family members, which may allow for dividends to be paid with some discretion.
For the individual, dividend income is taxed differently than salaries. A dividend can’t be used to create RRSP contribution room because it is considered to be from investments as opposed to income that is earned through employment.
Dividends do not require payroll deductions. This increases cash flow for you and the company, but it reduces your chance to collect CPP.
Colin Miller is a chartered accountant and senior manager in KPMG’s tax practice in Lethbridge. Contact:
